Sound Like Cyprus? The SEC Proposed This Strict New Rule on Money Market Account Withdrawals

The Securities and Exchange Commission proposed last week a new rule that would make it more difficult for investors to withdraw from money market investment funds “during times of financial distress,” as Reuters puts it.

Yes, the SEC is mulling a proposal that would delay withdrawal requests from institutional investors (as opposed to individual investors) during financial crises. Sounds a little like Cyprus, no?

The SEC voted 5-0 to advance additional reforms, which would require shares of some money-market funds to "float", instead of having a fixed value of $1 per share. The proposal failed to gain support last year but has since won the backing of a panel of regulators that include Federal Reserve Chairman Ben Bernanke.

The agency also proposed new fees on withdrawals from funds if their assets that can be readily converted into cash fall below a certain level.

The public has 90 days to comment on the proposals. At some later point, the agency would finalize the rules or settle on a modified version of them.

Requiring values to float would make some money funds more like bonds, whose principal changes with increases or decreases in interest rates. That's a fundamental shift because it means investors could lose principal if the value falls below $1.

Proponents say it is necessary change because it would show money funds, while safer than stocks and many other investments, still carry some level of risk. They say more awareness of the risk would reduce the potential for runs on money funds.

The SEC proposal would limit the floating-value requirement to those money-market funds known as "prime."

Prime funds attract mainly big institutional investors as opposed to retail customers and are considered more risk-prone because they invest in short-term corporate debt. They represent roughly half of the total $2.9 trillion assets held by all money-market mutual funds.

Exempt from the floating-value requirement would be money-market funds that hold at least 80 percent of their assets in cash or government securities, and retail funds - those limiting an investor's withdrawals to a maximum of $1 million per business day.

The problems in money-market funds during the 2008 crisis didn't involve those types of funds, SEC officials said.

"While money-market funds have ... long served as an important investment vehicle, the financial crisis of 2008 highlighted the susceptibility of these products to runs," SEC Chairman Mary Jo White said before the vote.

Mary Schapiro, who stepped down as SEC chairman in December, pushed unsuccessfully last year for a floating value for all money-market funds and a requirement that money funds hold capital reserves of 1 percent of the fund's assets. But three of the five commissioners opposed those changes and her proposal was never brought to a vote.

Some commissioners appeared to be sympathetic to arguments made by representatives for the industry, who complained that most of the changes previously recommended would make money funds unattractive and lead to fewer investors.

This time, however, the SEC faced pressure from the Financial Stability Oversight Council, a group of high-level regulators that has backed both the floating-value requirement and calls for strict capital reserves. Bernanke and Treasury Secretary Jacob Lew both sit on the panel.

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The Associated Press contributed to this report.